There are several things we do:
- We keep a cash reserve from the capital we raise from you to help offset this risk.
- We are conservative in our underwriting about things like taxes and insurance, which have been rising rapidly recently.
- For construction, we want to have significant line items for contingency reserves.
- We generally work with Sponsors that have a long track record of delivering projects on time and budget.
- The interest rate risk is primarily with existing owners. If they have not had much NOI (net operating income) growth AND if when they got their current loan four years ago, they maxed their debt – these are the types of owners that tend to need to bring cash when they refinance their property, typically near the five-year anniversary.
- There’s a significant silver lining to this cloud. In some cases, these types of owners don’t have the cash to bring to a refinance. This forces them to sell. Since there are fewer buyers now, we often pick up these properties for 8-11% less than we were paying just a few years ago. That increases our IRR for our investors.